Documentary Credit Concept

Documentary Credit Concept

Documentary credit that is also known is letter of credit is a guaranteed payment method to exporter. Letter of credit is a risk free payment arrangement.

1.    Risk Free Payment

Letter of Credit ensures risk free payment to exporters against his export. This method may also be used for short term financing by exporter by entering in into a discounting arrangement.

2.    Issued before Trade

Documentary credit is opened by importer before the trade i.e. before sales take place. Documentary credit is widely used in international trade.

3.    Issued at request of Importer

Documentary Credit is issued by bank at the request of importer. The bank issue the documentary credit is known as issuing bank.

4.    Issuing Bank Guarantees the Payment

Issuing bank Guarantees the payment to the export. This guarantees come into existence once the letter of credit is issued by the issuing bank at the request of importers.

5.    Information to Exporter

Issuing bank ask advising bank (a bank in country of exporter) to inform Exporter about the opening of letter credit and advising bank inform the exporter about letter of credit issuance/opening.

6.    Advising Bank may also Guaranteed payment

Advising bank may also add its guarantee for payment, in such cases the advising bank is called confirming bank.